Question

1. Identify and explain three of the factors that help determine how elastic demand for a particular good is. Discuss how the factors you select would help explain the price elasticity of demand for a sweater from Banana Republic.

2. Flavor Flav has released a new exercise DVD for his loyal fans. If he charges $20 he expects to sell 10,000 copies; if he charges $30, he expects to sell 8,000 copies. Calculate the elasticity of demand for this product between those two points. Is this demand elastic or inelastic?

3. Barron used to make $2,500 a month and eat sushi three times per month. Now he is making $3,500 a month and is eating sushi seven times per month. What is Barron’s income elasticity of demand for sushi? For Barron, is sushi 1) a normal good or an inferior good, and 2) a necessity or a luxury?

Answer 1

The degree of responsiveness of demand for a commodity with reference to change in the price of such commodity is called PRICE ELASTICITY OF DEMAND.

Following are the factors that determine the price elasticity of demand of a commodity:

INCOME LEVEL: Income level is one of the major determinants of price elasticity of demand.

Elasticity of demand for any commodity is less for higher income level groups and more for lower income level groups. This is because demand for lower income group is highly elastic as poor people are highly affected by changes in the price of goods but rich people are not influenced.

Example: If the price of sweaters from Banana Republic increases then the rich people won't be affected by this increase in price, but people with less income will be highly affected. Therefore, this increase in price in the sweaters will lead to higher price elasticity of demand for the poor people.

NATURE OF COMMODITY: Another important factor that determine the price elasticity of demand is the nature of commodity. A commodity for a person may be a necessity, comfort or luxury.

NECESSITY- If a commodity is a necessity like food it's demand is inelastic as food is required for survival.

COMFORT- If a commodity is a comfort like fan, refrigerators etc. then it's demand is elastic and will be affected by change in price.

LUXURY- Luxurious products like AC, cars etc., are highly elastic.

Therefore, demand for sweaters from Banana republic depends on the consumer's nature for that sweater. For a consumer sweater can be a necessity and it's demand can be inelastic.

TIME PERIOD: Price elasticity of demand is also related to the time period. Demand is generally inelastic in the short period. In the long run the price elasticity of demand is more elastic as it is easier to shift to other substitutes , if the price of a given commodity increases. For example, if the price of sweaters from Banana Republic increases in the beginning of winters then the demand will be elastic.

Income elasticity of demand measures the responsiveness change in the demand due to a change in income.